Mortgage Rate Forecast Clouded by War Moves, Tariffs and the Federal Reserve

CNET

11 hours ago

Buyers should keep an eye on the possibility of rate cuts in the next few months.
Tharon Green/CNET
The housing market is hardly immune to political and economic volatility, yet mortgage rates have been eerily calm over the last period. Since the spring, the average rate for a 30-year fixed mortgage has moved in a mostly narrow range around 6.8% and 7%.
Mortgage rates were expected to gradually improve in 2025. However, the Trump administration's inflationary tariffs, deficit spending and geopolitical maneuvering led to bleaker forecasts, including fewer interest rate cuts by the Federal Reserve.
The Mortgage Bankers Association now predicts that mortgage rates will decline only slightly to 6.7% by the end of the year.
"You'd need to see mortgage rates pretty far below current levels, certainly below 6.75%, to incentivize homebuyers," said Beth Ann Bovino, chief economist at U.S. Bank.
Economists were also monitoring how a war in the Middle East could spark fresh volatility across global markets, significantly affecting oil prices and the US dollar, which would have a ripple effect on long-term Treasury yields and mortgage rates.
However, with the Israel-US-Iran ceasefire holding steady for now, rates haven't undergone major fluctuations. Logan Mohtashami, lead analyst of Housing Wire, said that traders mostly saw the bombing of Iran's nuclear facilities as a short-term event, muting the impact on mortgage rates.
In the coming weeks, housing market experts will be assessing the potential for another military escalation, oil prices and how the Fed responds to labor market data and recession risks. If any of these variables lead to a downward trend in home loan rates, more buyers may come off the sidelines.
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Fed interest rate cut still projected for fall
Despite widespread pleas for lower consumer borrowing costs, including from the White House, the Fed held interest rates steady for the fourth consecutive time this year at its monetary policy meeting on June 18.
While two Fed officials this week floated the possibility of a July cut, the market largely projects an interest rate cut in September. Fed Chair Jerome Powell has reaffirmed a "wait and see" posture, with concerns over the inflationary impact of tariffs.
The Fed is tasked with maintaining maximum employment and containing inflation, primarily through setting its short-term benchmark interest rate for lenders. A sluggish economy typically warrants interest rate cuts to stimulate growth, but lowering rates too quickly could fuel price growth when inflation is still above target.
Monetary policy changes by the Fed influence overall borrowing rates, though it's not a one-to-one relationship with home loans. In 2024, the central bank cut interest rates three times, but mortgage rates didn't fall.
Mortgage rates are primarily driven by movement in the bond market, specifically the 10-year Treasury yield. Bond yields and interest rates rise or fall depending on how inflation and labor data shift investor speculation and risk assessment.
How war and tariffs impact mortgage rates
Since mortgage rates are highly sensitive to fiscal policy and supply chain shocks, a global trade war and a military war with Iran could impact the direction of mortgage rates in either direction.
For example, if inflation increases due to tariff policies or a surge in energy costs, mortgage rates could increase.
"Even though many of the tariffs are in place, some of the big ones have yet to take effect," said Bovino. The average household in the US is expected to lose about $3,000 in income from tariffs, with lower-income households getting hit even harder, according to Bovino.
Conversely, a prolonged conflict in the Middle East could also spark fear of a downturn and propel investors to buy government-backed investments like US Treasury bonds. During heightened geopolitical turmoil, increased demand for "safe-haven" bonds can drive prices up and yields down, temporarily pushing mortgage rates lower.
However, a brief confrontation of air strikes is not the same as a sustained battle with boots on the ground, according to Matt Graham of Mortgage News Daily. The bigger the US involvement, the higher the implications for the market.
"While it's true that major geopolitical conflicts historically have a positive connotation for interest rates, that reaction can be tempered or even counteracted by a variety of factors," Graham said in an email. If the geopolitical conflict has a negative impact on inflation due to a spike in oil prices, for example, that can offset bond demand.
Coping with an unaffordable housing market
Major affordability challenges resulted in another inactive spring homebuying season. Even as the long-standing housing shortage eases in several local markets and gives some buyers improved negotiating power, the rest remain locked out by steep home prices.
"Prices are still incredibly high," Bovino said. "Add to that the borrowing costs of a mortgage, and it's prohibitively expensive for most people to get into the housing market." Plus, with recession risks still on the horizon, people who are nervous about finances will be more reluctant to take on mortgage loan debt.
Prospective buyers waiting for mortgage rates to drop may soon have to adjust to the "higher for longer" rate environment, with mortgage rates fluctuating between 5% and 7% over the longer term.
While market forces are out of your control, there are ways to make buying a home slightly more affordable. Last year, nearly half of all homebuyers secured a mortgage rate below 5%, according to Zillow.
Here are some proven strategies that can help you save up to 1.5% on your mortgage rate.
💰 Build your credit score. Your credit score will help determine whether you qualify for a mortgage and at what interest rate. A credit score of 740 or higher will help you qualify for a lower rate.
💰 Save for a bigger down payment. A larger down payment allows you to take out a smaller mortgage and get a lower interest rate from your lender. If you can afford it, a down payment of at least 20% will also eliminate private mortgage insurance.
💰 Shop for mortgage lenders. Comparing loan offers from multiple mortgage lenders can help you negotiate a better rate. Experts recommend getting at least two to three loan estimates from different lenders.
💰 Consider mortgage points. You can get a lower mortgage rate by buying mortgage points, with each point costing 1% of the total loan amount. One mortgage point equals a 0.25% decrease in your mortgage rate.
Watch this: 6 Ways to Reduce Your Mortgage Interest Rate by 1% or More
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